London, April 07: Long-term investors do not appear overly concerned about Britain’s election delivering an inconclusive result despite market wobbles about a “hung parliament”.
Analysts who track institutional investor flows report strong inflows into UK equities, steady demand for British government bonds and caution, rather than flight, when it comes to sterling.
Fund managers, meanwhile, say investors are taking decisions on a broad range of issues, not just on the immediate potential for political uncertainty.
In short, what has been a fixation in UK media and political circles — the rare prospect of a hung parliament in which no party has an overall majority or a strong mandate for painful measures to cut Britain’s bloated debt — is not resonating loudly with longer-term investors.
“The elections are just a small part of how investors look at the UK,” said Emiel van den Heligenberg, head of tactical allocation at BNP Paribas Investment Partners.
“You could argue that a hung parliament is difficult … but it should only be one of many factors. I don’t see people strategically moving away from the UK.”
That is not to say there will not be short-term market wobbles were a hung parliament to result from the May 6 poll.
But institutional decisions — by contrast with short-term trading — are being driven more by issues such as euro zone weakness, the quality of UK stocks and the rise of the dollar as the U.S. economy rebounds.
There is also a strong view that Britain is better placed to work itself out of economic trouble than, say Greece or Portugal, no matter what colour of government is formed.
“The UK is one of the few countries where you can expect something (in the way of austerity),” said Kommer van Trigt, bond fund manager with Robeco Group.
In Reuters’ late March asset allocation polls, U.S. and Japanese institutional investors actually increased their exposure to UK stocks and bonds, while continental Europeans slightly trimmed their exposure.
British investors, perhaps more tuned in to domestic events, stepped back more firmly from UK assets in March.
In a Reuters poll last week economists saw a median 55 percent chance of a hung parliament.
Global Reach
On the whole, investors do not appear as concerned about the election creating political stalemate as might be expected.
Nowhere is this more evident than on the British stock market. The FTSE 100 is up 6.75 percent this year, outperforming most U.S. and European bourses and hitting a fresh 21-month high as Brown was preparing to call the election.
A lot of this has to do with the non-UK sensitive nature of the index, which incorporates many of the world’s largest and most dynamic multinationals, those most likely to benefit from a global economic recovery.
But further down the scale there have also been impressive gains that belie suggestions of concern about political uncertainty.
The FTSE mid-cap index is up nearly 12 percent for the year, one of the world’s best performers. The small-cap index has gained 4.6 percent.
The main reason is that large investors are focusing on what they see as good value in UK stocks, not on short-term worries about politics.
“We think that UK equities are very appealing,” said Franz Wenzel, senior strategist at AXA Investment Managers. “Their earnings multiple is extremely low, in particular compared with the earnings growth forecasts for the next couple of years.”
Short Vs Long
Other UK assets are not quite so immune from election jitters but still do not appear to be overcome by fears that a weak government would be unable to tackle Britain’s huge debt.
The 10-year UK government bond yield is higher than it was during the height of the credit crisis, but it is still relatively low given concern about a burgeoning government debt and increased supply.
Simon Derrick, chief currency strategist at Bank of New York Mellon, said that flow data within the $22 trillion his bank holds as custodian or administrator, showed that far from deserting UK fixed income, investors were warming to it.
“Net holdings are moving back to levels they were at in 2007,” he said. “The fixed income story is pretty positive.”
Part of the reason, he said, was that for many investors British bonds looked a better bet than U.S. or euro zone debt.
Even when it comes to sterling — which has been volatile as talk of a hung parliament has grown, falling 1 percent against the dollar on Tuesday — there is more evidence that it is short-term investors at work than longer-term ones.
While trading data shows many hedge funds are short sterling, fund flow analysts say the currency is holding up.
“There is a recognition that sterling remains competitively priced,” Derrick said. “Sterling clearly looks like a long-term relatively good buy.”
–Reuters